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Here's Why Smart Investors Are Watching Pinterest Right Now

By Parkev Tatevosian, CFA – Oct 1, 2021 at 11:00AM

Key Points

  • Pinterest stock is down 36% in the past three months.
  • Yet the stock is still not cheap, trading at its average price-to-sales ratio.
  • One key investor concern: a recent loss in monthly active users.

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The market is turning sour on this image-based, social media business -- which could be an opportunity.

Savvy investors tend to have an uncanny ability to find good values. So it will not be surprising if there is an increasing share of sharp investors paying attention to Pinterest (PINS -1.48%) stock right now. 

The image-based, social-media app benefited tremendously at the pandemic's onset and is now experiencing a reversal of that trend. The company's shares are down 36% in the past three months and 24% in 2021. The fall could create an opportunity for long-term investors.

A smiling person standing outside looking at their cell phone.

Image source: Getty Images.

Pinterest sheds monthly active users

The primary cause of Pinterest stock's decrease is a drop in monthly active users from the previous quarter. The market was expecting an increase. In its fiscal second quarter ended June 30, Pinterest reported a drop of 24 million users from the previous quarter -- down to a total of 454 million monthly active users. These are folks around the world who spend time browsing the app. Advertisers are interested in gaining their attention and are willing to pay Pinterest for the privilege to do so. Fewer users mean advertisers pay less to Pinterest.

The surprising turnaround in the trend makes investors unsure if the loss in Pinterest users was a one-quarter event or if it will continue downward. As is usual with any business, uncertainty adds risk; and all else being equal, investors want less risk. 

Not as damaging as it looks

But Pinterest's loss of monthly active users in the quarter is not as bad as it looks on the surface. After spending so much time cooped up at home, it's understandable that folks are going out more often as economies reopen. Therein lies an upside to reopening economies: Businesses are ramping up advertising to get the word out that they are open. That boost in ad  sales increased Pinterest's revenue by 125% in the second quarter vs. the same time last year.

Moreover, even though the numbers show a decline in monthly active users, it doesn't necessarily mean Pinterest has lost those consumers permanently; it just means they haven't opened their app or logged in from a computer browser in the past month. It is very possible that some of those users will reconnect after spending some time away. 

Pinterest stock is trading at a lower price

Nevertheless, the market turned sour on the stock, and it has continued to fall. Pinterest is trading at a price-to-sales ratio of 14, down significantly from the 32 it was selling for earlier in the year. Using that metric, the stock is still not cheap, trading right around its historical average.

That could be why intelligent investors are not buying the stock in large quantities just yet. Pinterest is likely on their watch lists, and they are waiting for the stock to either fall further or for better news regarding monthly active users. Even if Pinterest reports that monthly active user growth is leveling off, it could entice the market to change its sentiment as the risk diminishes -- and to intelligent investors, reducing risk is adding value. 

Parkev Tatevosian owns shares of Pinterest. The Motley Fool owns shares of and recommends Pinterest. The Motley Fool has a disclosure policy.

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